Financial risks from climate change Assessing exposure to ......increasing obligation to consider...
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How can we help? PwC has designed a climate risk assessment tool with a robust methodology that efficiently assesses climate risk exposure, under different scenarios, for use across your current and future portfolio. The types of climate risk assessed in the tool are aligned to the TCFD risk categories: Physical risks: physical impacts of climate change, including increases in both the frequency and severity of extreme weather events, such as floods, heatwaves and droughts. Transition risks: policy, legal, technology, and market risks associated with the transition to a low-carbon economy. An example transition risk could be a government imposing a universal carbon tax. Our tool includes 'impact pathways' which explain each risk event so you can understand the potential outcome and financial impact for your business (see diagram below). Assessing exposure to climate-related risks in Private Equity portfolios Stand out for the right reasons PwC Climate Risk Assessment Tool Financial risks from climate change There is an increasing focus on climate-related risks and opportunities in the financial services sector. In June 2017, the Taskforce for Climate-related Financial Disclosure (TCFD) published recommendations aimed at increasing disclosures from investors and companies about the financial risks and opportunities from climate change and how they are being managed. Since then, there has been a number of related initiatives in the private equity industry. For example, we are working with Invest Europe to develop climate change guidance; and Initiative Climate 2020 (IC20) is working to develop common methodologies for private equity houses for carbon footprinting, and to manage and reduce portfolio company emissions.. As a result, many private equity houses are starting to consider climate risk across the deal cycle and climate risk management has been recognised as being key to prudent risk management, company performance and equity valuation. Highlight PwC has developed a user friendly tool with a comprehensive and robust methodology to assess both physical and transition climate risks and opportunities within your current and future portfolio; assisting you to measure, report and act on climate risks. Nicky Crawford T: +44 (0)7483401805 E: [email protected] Leanne Bouvet T: +44 (0) 7483 440 137 E: [email protected] Alison Cambray T: +44 (0) 7700 838337 E: [email protected] Amy Pickering T: +44 (0) 7781 125874 E: [email protected] UK Contacts 1.5ºC temperature increase Scenarios 2ºC temperature increase Physical risks e.g. Drought risk Flooding risk Heat stress Risks Transition risks e.g. Carbon pricing Emission standards Economic regulation Outcomes Increase in commodity prices Shifts in demand Increase in input costs Increase in production costs 4ºC temperature increase Loss of revenue Financial impact Stranded assets Higher energy costs Asset value is impaired Example impact pathways showing the financial impacts of physical and transition risks Drivers for managing climate risk There are several key drivers for assessing climate risk within your portfolio: 1) Institutional investors have an increasing obligation to consider climate change risks and opportunities. This is driving action to maintain investment flows. 2) Industry groups such as the Principles for Responsible Investment (PRI) and Institutional Investors Group on Climate Change (IIGCC) are backing the need for climate risk assessments. The TCFD recommendations will become mandatory for PRI signatories. 3) TCFD has demonstrated the business case for the benefits of managing climate related risks and opportunities. CI Contacts
Transcript of Financial risks from climate change Assessing exposure to ......increasing obligation to consider...
How can we help?
PwC has designed a climate risk assessment tool with a robust methodology that efficiently assesses climate risk exposure, under different scenarios, for use across your current and future portfolio. The types of climate risk assessed in the tool are aligned to the TCFD risk categories:
Physical risks: physical impacts of climate change, including increases in both the frequency and severity of extreme weather events, such as floods, heatwaves and droughts.
Transition risks: policy, legal, technology, and market risks associated with the transition to a low-carbon economy. An example transition risk could be a government imposing a universal carbon tax.
Our tool includes 'impact pathways' which explain each risk event so you can understand the potential outcome and financial impact for your business (see diagram below).
Assessing exposure to climate-related risks in Private Equity portfolios
Stand out for the right reasonsPwC Climate Risk Assessment Tool
Financial risks from climate change
There is an increasing focus on climate-related risks and opportunities in the financial services sector. In June 2017, the Taskforce for Climate-related Financial Disclosure (TCFD) published recommendations aimed at increasing disclosures from investors and companies about the financial risks and opportunities from climate change and how they are being managed.
Since then, there has been a number of related initiatives in the private equity industry. For example, we are working with Invest Europe to develop climate change guidance; and Initiative Climate 2020 (IC20) is working to develop common methodologies for private equity houses for carbon footprinting, and to manage and reduce portfolio company emissions.. As a result, many private equity houses are starting to consider climate risk across the deal cycle and climate risk management has been recognised as being key to prudent risk management, company performance and equity valuation.
Highlight
PwC has developed a user friendly tool with a comprehensive and robust methodology to assess both physical and transition climate risks and opportunities within your current and future portfolio; assisting you to measure, report and act on climate risks.
Nicky CrawfordT: +44 (0)7483401805E: [email protected]
Leanne Bouvet T: +44 (0) 7483 440 137E: [email protected]
Alison CambrayT: +44 (0) 7700 838337E: [email protected]
Amy PickeringT: +44 (0) 7781 125874E: [email protected]
UK Contacts
1.5ºC temperature
increase
Scenarios
2ºC temperature
increase
Physical risks e.g.Drought riskFlooding riskHeat stress
Risks
Transition risks e.g.Carbon pricingEmission standardsEconomic regulation
Outcomes
Increase in commodity
prices
Shifts in demand
Increase in input costs
Increase in production
costs
4ºC temperature
increase
Loss of revenue
Financial impact
Stranded assets
Higher energy costs
Asset value is impaired
Example impact pathways showing the financial impacts of physical and transition risks
Drivers for managing climate risk
There are several key drivers for assessing climate risk within your portfolio:
1) Institutional investors have an increasing obligation to consider climate change risks and opportunities. This is driving action to maintain investment flows.
2) Industry groups such as the Principles for Responsible Investment (PRI) and Institutional Investors Group on Climate Change (IIGCC) are backing the need for climate risk assessments. The TCFD recommendations will become mandatory for PRI signatories.
3) TCFD has demonstrated the business case for the benefits of managing climate related risks and opportunities. CI Contacts
Benefits of climate risk assessments
Climate risk assessments directly responds to the TCFD recommendations to appropriately assess and price climate-related risks and opportunities. Specifically, our climate risk tool provides a quick, efficient and comprehensive way to identify hotspots for climate risk across your investments. The key benefits are listed below:
1. Identifying hotspots for climate risk can allow you to take action in order to avoid unexpected business impacts.2. Assessing your exposure to climate-related risks allows you to demonstrate and communicate to investors that you are
identifying and managing the risk.. 3. When used at the pre-acquisition stage, this tool can be used as an initial screening to help determine if a full risk climate
risk assessment is required.4. Finally, this tool can help you to identify opportunities associated with the transition to a low carbon economy which could be a
value-creating proposition for investors.
PwC’s Climate Risk Tool explained
Based upon the climate scenario selected and the data input in the tool, an overall risk rating is presented for the portfolio company for physical and transition risks.
The tool also assesses and rates how resilient the business is to cope with climate risks.
The risk ratings can further be broken down for individual country locations of both the portfolio company and its supply chain.
This is an example of how outputs can be displayed. The tool can be customised to meet your specific needs.
Why choose PwC?We have credibility and expertise in climate risk, with a key role on the TCFD, advising multiple financial services sector clients on engaging the board, identifying climate risk hotspots and undertaking scenario analyses.
The tool is simple and easy to understand. Climate change can be a complex subject to communicate to a wider audience. We use simple language and a simple interface and outputs that can be understood by all users
The assessment can be done quickly. The tool requires minimal data input allowing screening to be undertaken at various stages in the investment lifecycle.
The methodology is robust. All our data comes from reliable external sources and our methodology has been peer reviewed internally by climate change experts.
Risk of extreme weather events
Low risk
Risk of transitioning to a
low carbon economy
Medium risk
Business resilience to climate risk
Low resilience
Overall risk score
Scenario selector 2°C
Risk breakdown
Country Business area
Extreme weather risk
Risk of transitioning to a low carbon economy
Germany Portfolio business
Low risk Low risk
Bulgaria Portfolio business
Low risk Medium risk
India Supply chain Medium risk Medium risk
Case study
We recently worked with a private equity firm who had not undertaken a climate risk assessment within their portfolio businesses before. For one of these businesses, regulations introducing more stringent emissions standards were implemented and their suppliers were not ready to comply with this legislation. The supplier was unable to continue to sell their product and could not meet the demands of the portfolio business. The portfolio business lost sales and revenue as they could not deliver their service to their customers. This ultimately led to lost value for the PE house. Our tool could have been used early on to identify and proactively manage such climate risks.
Risk rating Definition
Low risk
There is a low climate risk to the portfolio business and its supply chain in 2030
Medium risk
There is a medium climate risk to the portfolio business and its supply chain in 2030
High risk There is a high risk to the portfolio business and its supply chain in 2030
Business resilience rating
Definition
Low resilienceThe business has a low resilience to climate risk.
Medium resilience
The business has a medium resilience to climate risk.
High resilienceThe business has a high resilience to climate risk.
Definitions
This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors.
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